Examples: Gross-up method and Alternative gross-up method. A and B are employees of Y Organization.

1. A's activities involve significant judgment with respect to lobbying activities.
2. A's basic lobbying labor costs (excluding employee benefits) are $50,000.
3. B performs clerical and support activities for A.
4. B's labor costs (excluding employee benefits) in support of A's activities are $15,000.
5. Allocable third-party costs are $100,000.

If Y Organization uses the gross-up method to allocate its lobbying costs, Y multiplies 175% times its basic labor costs (excluding employee benefits) for all of the lobbying of its personnel and adds its allocable third-party lobbying costs as follows:

175% × $65,000	+	$100,000	=	$213,750
Basic lobbying labor costs of A + B		Allocable third-party costs		Costs allocable to lobbying activities

If Y Organization uses the alternative gross-up method to allocate its lobbying costs, Y multiplies 225% times its basic labor costs (excluding employee benefits) for all of the lobbying hours of its lobbying personnel and adds its third-party lobbying costs as follows:

225% × $50,000	+	$100,000	=	$212,500
Basic lobbying labor costs of A		Allocable third-party costs		Costs allocable to lobbying activities

Section 263A cost allocation method. The examples that demonstrate this method are found in Regulations section 1.162-28(f).

Line 85a - Section 6033(e)(3) exception for nondeductible dues

If your organization meets any of the criteria of Exception 1 in the line 85 instructions, answer Yes to question 85a. By doing so, you are declaring that substantially all of the organization's membership dues were nondeductible. Skip lines 85b through 85h.

Line 85b - In-house lobbying expenditures

An organization is exempt from the notice, reporting, and proxy tax liability rules of section 6033(e) if it meets Exception 2, the $2,000 in-house lobbying exception. Both exceptions are discussed in the instructions for line 85.

An organization should answer Yes to question 85b if it met all of the requirements of Exception 2. Skip lines 85c through 85h.

If the organization's in-house direct lobbying expenditures during the 2001 reporting year were $2,000 or less, but the organization also paid or incurred other lobbying or political expenditures during the 2001 reporting year, or received a waiver for proxy tax owed for the prior year, it should answer No to question 85b and complete lines 85c through 85h. However, the $2,000 or less of in-house direct lobbying expenditures should not be included in the total on line 85d.

Definitions.

Grassroots lobbying refers to attempts to influence any segment of the general public regarding legislative matters or referendums.

Direct lobbying includes attempting to influence:

• Legislation through communication with legislators and other government officials, and
• The official actions or positions of covered executive branch officials through direct communication.

Direct lobbying does not include attempting to influence:

• Any local council on legislation of direct interest to the organization or its members, and
• The general public regarding legislative matters (grassroots lobbying).

Other lobbying includes:

• Grassroots lobbying,
• Foreign lobbying,
• Third-party lobbying, and
• Dues paid to another organization that were used to lobby.

In-house expenditures include:

• Salaries, and
• Other expenses of the organization's officials and staff (including amounts paid or incurred for the planning of legislative activities).

In-house expenditures do not include:

• Any payments to other taxpayers engaged in lobbying or political activities as a trade or business.
• Any dues paid to another organization that are allocable to lobbying or political activities.

Line 85c - Dues, assessments, and similar amounts received

Enter the total dues, assessments, and similar amounts allocable to the 2001 reporting year.

The term dues means the amount the organization requires a member to pay in order to be recognized as a member.

Payments that are similar to dues include:

1. Members' voluntary payments,
2. Assessments to cover basic operating costs, and
3. Special assessments to conduct lobbying and political activities.

Line 85d - Lobbying and political expenditures

Include on line 85d the total amount of expenses paid or incurred during the 2001 reporting year in connection with:

1. Influencing legislation;
2. Participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for any public office;
3. Attempting to influence any segment of the general public with respect to elections, legislative matters, or referendums; or
4. Communicating directly with a covered executive branch official in an attempt to influence the official actions or positions of such official.

Also include on line 85d:

1. Excess lobbying and political expenditures carried over from the preceding tax year.
2. An amount equal to the taxable lobbying and political expenditures reported on line 85f for the preceding tax year, if the organization received a waiver of the proxy tax imposed on that amount.

Do not include:

1. Any direct lobbying of any local council or similar governing body with respect to legislation of direct interest to the organization or its members.
2. In-house direct lobbying expenditures, if the total of such expenditures is $2,000 or less (excluding allocable overhead).
3. Political expenditures for which the section 527 tax has been paid (on Form 1120-POL).

• Reduce the current year's lobbying expenditures, but not below zero, by costs previously allocated in a prior year to lobbying activities that were cancelled after a return reporting those costs was filed.
• Carry forward any amounts not used as a reduction to subsequent years.

Line 85e - Dues declared nondeductible in notices to members

Enter the total amount of dues, etc., allocable to the 2001 reporting year that members were notified were nondeductible under section 162(e).

Example.

• Membership dues: $100,000 for the 2001 reporting year
• Organization's timely notices to members - 25% of membership dues nondeductible
• Line 85e entry - $25,000

Line 85f - Taxable lobbying and political expenditures

The taxable amount reportable on line 85f is the amount of dues, etc.:

1. Allocable to the 2001 reporting year, and
2. Attributable to lobbying and political expenditures that the organization did not timely notify its members were nondeductible.

If the amount on line 85c (dues, etc.) is GREATER than the amount on line 85d (lobbying & political expenses), then:

	Line 85d (lobbying & political expenses)
Less:	Line 85e (dues shown in notices)
Equals:	Line 85f (taxable lobbying & political expenses)

If the amount on line 85c (dues, etc.) is LESS than the amount on line 85d (lobbying & political expenses), then:

	Line 85c (dues, etc.)
Less:	Line 85e (dues shown in notices)
Equals:	Line 85f (taxable lobbying & political expenses), and

*

	Line 85d (lobbying & political expenses)
Less:	Line 85c (dues, etc.)
Equals:	The excess amount to be carried over to the following tax year and reported on line 85d (lobbying & political expenses), or its equivalent, on the year 2002 Form 990.

See Examples given below.

Lines 85g and 85h - Proxy tax and waivers

An organization must pay the section 6033(e) proxy tax on the amount reported on line 85f unless it has the option to check Yes on line 85h.

If the amount on line 85f is zero, or less than zero, enter on:
Line 85g	N/A
Line 85h	N/A
If the organization sent dues notices to its members at the time of assessment or payment of dues that reasonably estimated the dues allocable to the nondeductible lobbying and political expenditures reported on line 85d, enter on:
Line 85g	No
Line 85h	Yes
Include the amount from the 2001 Form 990, line 85f, on the year 2002 Form 990, line 85d, or its equivalent.
If the organization did not send these dues notices, enter on:
Line 85g	Yes
Line 85h	No
Report the proxy tax on Form 990-T.

Examples. Organizations A and B:

1. Reported on the calendar year basis.
2. Incurred only grassroots lobbying expenses (did not qualify for the under $2,000 in-house lobbying exception (de minimis rule)).
3. Allocated dues to the tax year in which received.

For Organization A - Dues, assessments, and similar amounts received in 2001 were GREATER than its lobbying expenses for 2001.

Workpapers (for 2001 Form 990) - Organization A
1.	Total dues, assessments, etc., received	$800
2.	Lobbying expenses paid or incurred		$600
3.	Less: Total nondeductible amount of dues notices	100	100
4.	(Subtract line 3 from both lines 1 and 2.)	$700	$500
5.	Taxable amount of lobbying expenses (smaller of the two amounts on line 4)		$500

Note: The amounts on lines 1, 2, 3, and 5 of the workpapers were entered on lines 85c through 85f of the 2001 Form 990.

Because dues, etc., received were GREATER than lobbying expenses, there is no carryover of excess lobbying expenses to line 85d of the year 2002 Form 990.

See the instructions for lines 85g and 85h for the treatment of the $500.

For Organization B - Dues, assessments, and similar amounts received in 2001 were LESS than its lobbying expenses for 2001.

Workpapers (for 2001 Form 990) - Organization B
1.	Total dues, assessments, etc., received	$400
2.	Lobbying expenses paid or incurred		$600
3.	Less: Total nondeductible amount of dues notices	100	100
4.	(Subtract line 3 from both lines 1 and 2.)	$300	$500
5.	Taxable amount of lobbying expenses (smaller of the two amounts on line 4)	$300

Note: The amounts on lines 1, 2, 3, and 5 of the workpapers were entered on lines 85c through 85f of the 2001 Form 990.

Because dues, etc., received were LESS than lobbying expenses, excess lobbying expenses of $200 must be carried forward to line 85d of the year 2002 Form 990 (excess of $600 of lobbying expenses over $400 dues, etc., received). The $200 will be included along with the other lobbying and political expenses paid or incurred in the 2002 reporting year and reportable on line 85d (or the equivalent line) of the year 2002 Form 990.

See the instructions for lines 85g and 85h for the treatment of the $300.

Underreporting of lobbying expenses. An organization is subject to the proxy tax for the 2001 reporting year for underreported lobbying and political expenses only to the extent that these expenses (if actually reported) would have resulted in a proxy tax liability for that year. A waiver of proxy tax for the tax year only applies to reported expenditures.

An organization that underreports its lobbying and political expenses is also subject to the section 6652(c) daily penalty for filing an incomplete or inaccurate return.

Line 86 - Section 501(c)(7) organizations

Gross receipts test. A section 501(c)(7) organization may receive up to 35% of its gross receipts, including investment income, from sources outside its membership and remain tax-exempt. Part of the 35% (up to 15% of gross receipts) may be from public use of a social club's facilities.

Gross receipts are the club's income from its usual activities and include:

• Charges,
• Admissions,
• Membership fees,
• Dues,
• Assessments, and
• Investment income (such as dividends, rents, and similar receipts), and normal recurring capital gains on investments.

Gross receipts do not include:

• Capital contributions (see Regulations section 1.118-1),
• Initiation fees, or
• Unusual amounts of income (such as the sale of the clubhouse).

Note: College fraternities or sororities or other organizations that charge membership initiation fees, but not annual dues, do include initiation fees in their gross receipts.

If the 35% and 15% limits do not affect the club's exempt status, include the income shown on line 86b on the club's Form 990-T.

Investment income earned by a section 501(c)(7) organization is not tax-exempt income unless it is set aside for:

• Religious,
• Charitable,
• Scientific,
• Literary,
• Educational purposes, or
• Prevention of cruelty to children or animals.

If the combined amount of an organization's gross investment income and other unrelated business income exceeds $1,000, it must report the investment income and other unrelated business income on Form 990-T.

Nondiscrimination policy. A section 501(c)(7) organization is not exempt from income tax if any written policy statement, including the governing instrument and bylaws, allows discrimination on the basis of race, color, or religion.

However, section 501(i) allows social clubs to retain their exemption under section 501(c)(7) even though their membership is limited (in writing) to members of a particular religion, if the social club:

1. Is an auxiliary of a fraternal beneficiary society exempt under section 501(c)(8), and
2. Limits its membership to the members of a particular religion; or the membership limitation is:
   1. A good-faith attempt to further the teachings or principles of that religion, and
   2. Not intended to exclude individuals of a particular race or color.

Line 87 - Section 501(c)(12) organizations

One of the requirements that an organization must meet to qualify under section 501(c)(12) is that at least 85% of its gross income consists of amounts collected from members for the sole purpose of meeting losses and expenses. For purposes of section 501(c)(12), the term gross income means gross receipts without reduction for any cost of goods sold.

For a mutual or cooperative electric or telephone company, gross income does not include amounts received or accrued as qualified pole rentals.

For a mutual or cooperative telephone company, gross income also does not include amounts received or accrued either from another telephone company for completing long distance calls to or from or between the telephone company's members, or from the sale of display listings in a directory furnished to the telephone company's members.

Line 88

Answer Yes to this question if at any time during the year, the organization owned a 50% or greater interest in a taxable corporation or partnership or an entity disregarded as separate from the organization under Regulations sections 301.7701-2 and 301.7701-3. If an organization answers Yes on line 88, complete Part IX, Information Regarding Taxable Subsidiaries and Disregarded Entities.

Line 89a - Section 501(c)(3) organizations: Disclosure of excise taxes imposed under section 4911, 4912, or 4955

Section 501(c)(3) organizations must disclose any excise tax imposed during the year under section 4911 (excess lobbying expenditures), 4912 (disqualifying lobbying expenditures), or, unless abated, 4955 (political expenditures). See sections 4962 and 6033(b).

Line 89b - Section 501(c)(3) and 501(c)(4) organizations: Disclosure of section 4958 excess benefit transactions and excise taxes

Sections 6033(b) and 6033(f) require section 501(c)(3) and (4) organizations to report the amount of taxes imposed under section 4958 (excess benefit transactions) involving the organization, unless abated, as well as any other information the Secretary may require concerning those transactions. See General Instruction P for a discussion of excess benefit transactions.

Attach a statement describing any excess benefit transaction, the disqualified person or persons involved, and whether or not the excess benefit transaction was corrected.

Line 89c - Taxes imposed on organization managers or disqualified persons

For line 89c, enter the amount of taxes imposed on organization managers or disqualified persons under sections 4912, 4955, and 4958, unless abated.

Line 89d - Taxes reimbursed by the organization

For line 89d, enter the amount of tax on line 89c that was reimbursed by the organization. Any reimbursement of the excise tax liability of a disqualified person or organization manager will be treated as an excess benefit unless (1) the organization treats the reimbursement as compensation during the year the reimbursement is made, and (2) the total compensation to that person, including the reimbursement, is reasonable.

Line 90a - List of states

List each state with which the organization is filing a copy of this return in full or partial satisfaction of state filing requirements.

Line 90b - Number of employees

Enter the number of employees on your payroll during the pay period including March 12, 2001, as shown on your Form 941 or Form 943 (January-March calendar quarter return only). Do not include household employees, persons who received no pay during the pay period, pensioners, or members of the Armed Forces.

Line 92 - Section 4947(a)(1) nonexempt charitable trusts

Section 4947(a)(1) nonexempt charitable trusts that file Form 990 instead of Form 1041 must complete this line. The trust should include exempt-interest dividends received from a mutual fund or other regulated investment company as well as tax-exempt interest received directly.

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